Understanding Credit; Credit Cards & Debt

This is Part 1 in a free five-part training series on personal finance. Parts 2-5 are coming soon. If you’d like to be notified via email when they become available please click here and register for updates.

The “D” Word

You may have heard the analogy of a rusty bucket as it pertains to money.

It seems that as the farmer was filling the bucket with milk from the top, holes in the bottom of the bucket allowed the milk to run out just as fast as it came in.

This must have infuriated the cow.

For all too many individuals and families, their financial bucket has holes that allow money to run out just as fast, or even faster than they can put it in.

One of the largest and most prevalent of these holes is DEBT and its servicing.

Of course, there are times when entering into debt is reasonable and wise.

However, these times are rare as compared with the reasons most people incur debt.

How Bad is This Problem?

That’s exactly what we are going to be covering in this training.

An Introduction to Consumer Credit

We’ll start with credit cards as for many they are something that is usually at the front of their mind.

Credit Cards & Personal Finance

  • In January 2021 the national average balance on personal credit cards was $6,028.
  • The average Annual Percentage Rate for credit cards was 21.25%.
  • The average number of credit cards per individual was 4 according to the Experian Consumer Review (R).

Using the average credit card debt amount, the average APR, and making the minimum monthly payment (usually calculated at 2% of your balance) it would take 907 months to pay off that $6,028.

During those 75 ½ years the borrower would have paid about $40,321 in interest charges. 

While extreme, this example also supposes that our unnamed credit card user does not incur any further debt during the 75 years of repayment.

According to the Guinness Book of World Records, Walter Cavanagh of Santa Clara, California has 1,397 individual credit cards, which together are worth more than $1.65 million in credit. He keeps them in the world’s longest wallet, which is 250 ft. in length and weighs 38 lbs. 8 oz.

Update: it looks like the new world record is held by Zheng Xiangchen from Shenzhen with 1562 credit cards (R).

Credit card users tend to develop spending habits that revolve around the ability to get easy credit.

The Ease of Credit & How it Affects Our Spending

Two professors, Drazen Preiec and Duncan Simester, at the Massachusetts Institute of Technology in Cambridge, conducted a very simple yet telling experiment (R).

They held an auction for tickets to a Boston Celtics basketball game.

Half of the bidders, chosen randomly, were told that the winner would have to pay for the tickets in cash (with grace time to come up with the money).

The other half were told they could use a credit card.

The bids of credit card users were twice as high as those of the cash users.

The “Chargers” were willing to spend more for the very same product.

If we add to this debt equation the fact that more and more people are not paying back the money they borrow, the picture becomes even more concerning.

You may be one of those rare birds who use credit cards for convenience rather than for immediate gratification.

You pay off your cards each month and never have to deal with finance charges. 

Or even rarer, you don’t use credit cards at all.

If either of these is you, then you can read along and feel good.

I commend you.

An Offer You Can’t Refuse

A few days ago, I received an email from my credit card company. It was a “Congratulations your credit limit has be raised” notice.

Realizing what the note was about, I feigned excitement and ran out of my home office to where my wife was.

“Hey, good news,” I called out. 

Smiling, my wife asked, “What happened?”

Perhaps she thought we had received some unexpected refund in the mail or some other monetary boon. With delight on my face I explained, “Our credit limit just got higher!” 

With that “Why are you wasting my time” look that I know so well, she just turned around and went about her business. 

You see, after being married for 43 years now, we have a very sound understanding about these things.

We just do not use our credit card except occasionally when traveling as a convenience.

For online purchases we use our debit card which many now have the same fraud protection that credit cards do. Because of that and considering our credit limit was long ago more than we would ever use, the happy announcement from the card company was a non-issue to us.

In fact, it was just another advertisement.

Satisfaction, security, and comfort come from knowing that you do not rely on credit to get through the month.

When the credit card statement comes, no anxiety or reluctance to open it is aroused when the balance is zero. 

Though smugness is not considered a virtue, when you are credit card debt free, it may be accepted as justified if enjoyed privately.

There are so many cute tricks and processes that are taught to help people get their credit card debt reduced.

How to Deal with Credit Card Debt

Here are some of the things many hear and that you likely have as well…

  • Refinance your home and pay off the cards.
  • Juggle balances around to temporary zero interest cards.
  • Prioritize your spending.
  • File bankruptcy.
  • Plead with creditors to cut you some slack.

Because this line of thinking is so common but completely skirts the core issue, I want to just cut to the chase by saying this.

Before all else, you must…

“Change the Way you Think about Debt.”

If you are having trouble with credit cards and do not change your core thinking on the subject, all the tricks and plans will just delay the inevitable. That is, more debt, stress, dissatisfaction, and financial unrest.

The 3 Ways Credit is Used

Credit can be used a few different ways but from our experience, it usually falls into one of three categories. Below you’ll find the three ways credit is utilized.

1. Consumables/perishables. This is by far the most dangerous use of credit. This category includes groceries, utility bills, fuel for automobiles, plane tickets, vacations, movies and entertainment. Anything that is used one time can be placed here. Though the pleasure or gratification is enjoyed now, the pain and strain of paying for the pleasure can last literally years and years.

2. Depreciating assets. If you acquire clothes, furniture, carpet, home decorating items, or automobiles you have experienced this type of debt. What happens is that you are obtaining these things at a premium only to see them immediately depreciate in value.

3. Investment. In this category, we find things such as training or education. Purchases including goods or services that are expected to produce additional income in the future.

Note: Student loans have not been considered in this discussion of credit card usage as they often go far beyond in scope. 

I have encountered many graduates including medical doctors and attorneys (professionals) who continued to struggle with the burden of student debt many years after graduating and earning the “big bucks.” 

Avoid student loans at all costs. Go to state schools. Work your way through to your utmost.

A poll taken in 2019 by CNBC (R) found that the average respondent took 18.5 years to pay off student loans.

(Barak Obama was 43 years old when he paid off his student loans (R).)

Start by Getting a Baseline of Your Current Credit Cards

To begin take a few moments to look over several of your past credit card statements.

Place a 1, 2, or 3 by each entry following the list above.

What percentage of your credit card activity falls into each category?

You may be one of those rare birds who use credit cards only for convenience, tracking, rewards, and extra perks some offer rather than for immediate gratification.

You may pay off your cards each month and never have to deal with finance charges.

If that describes you, then you can read along and feel good.

I commend you.


The desires for immediate gratification must be controlled.


Live on less than you make.  Always.


The emotional gratification of getting what you want now will be completely outweighed by the financial and emotional letdown and burden that will follow.


Skip the fluff, save up and pay cash.

Think like a saver and investor,
instead of a borrower and consumer.

What if I’m in Some Serious Consumer Debt Right Now?


Be assured you are not alone. 

Most of the people you know have been there one time or another too.

It may be that most everyone you know is in a similar situation even now.


It can be fixed.

You are not relegated to a permanent state of indebtedness and servitude to your creditors.

You can start changing the scenery right today.

Right now.

Quickstart to Ditching Debt and Embracing Financial Freedom

If you are looking to get out of consumer debt please understand it takes work, discipline, and a clear plan.

Here are a few tips.

1. Stop adding new consumer debt.

2. Get a clear picture of your debts by listing every debt you have from smallest to largest. Put it down on paper, type it into a document or add it to a spreadsheet.

3. Make a list of how you will save some money out of your current budget starting right now. List each action and how many dollars it represents.

Here are some possibilities.

  1. Skip Starbucks for a month. $75
  2. Pack a lunch every day instead of going out to lunch. $100
  3. Rent fewer movies or cut down on pay-per-views. $50
  4. Go out to dinner one less time each month. $45
  5. Cut down or eliminate your soda pop consumption. $25
  6. Go with more generic brands at the grocery store. $50
  7. Make one meal (or one more) a week from scratch. $25
  8. Only go to the grocery store with a list. No impulse buys. $100
  9. Are there any subscriptions you can eliminate? $?
  10. Stop shopping for entertainment. $?
  11. Don’t buy new clothes unless you actually need them? $$
  12. Turn down the heat or A/C and turn off lights you are not using. $20
  13. Cut down on smoking, drinking, or recreational drugs insofar as these may pertain. $?
  14. Are there any services you are paying for that you can do yourself? Hair, nails, lawn mowing, car washes. $?
  15. Spend less on hobbies. $?
  16. Sell some stuff that you are no longer using. $?

As you can see, this list can be a long one.

You will be able to find more items to add based on your own circumstance and lifestyle.

How much can you save out of your budget by just making some adjustments as suggested above?

$100, $200, $400 a month?

Maybe much more.

  1. Make minimum payments until you have one month of basic expenses in the bank. This cushion helps the mind.
  2. Apply these savings you found to the principle on your smallest debt.
  3. Once that smallest debt is knocked out apply its former payment and the new cash you found in #3 above to the next debt on your list.
  4. Rinse and repeat.

With each debt retired there is a larger amount of monthly dollars to apply to the next one. 

Just as importantly, with each debt you eliminate its place will be taken by a growing sense of confidence, hope, and personal power.

One thing to consider as well is increasing your current income.

Why should you consider this?

Well…we can often only save so much from our existing budget.

Yet we can potentially earn more and more from your current career or job, side jobs, freelance or gig work, and beyond.

You are literally only limited by your creativity these days.

What if it’s Really Bad?

In some cases, more sacrifice and alteration are required.

It could be that you need to get rid of a car payment and drive something humbler for a while. 

Or sell extra toys like boats, 4-wheelers, motorcycles and such. If this is you, you’ll know it.

Note: Rather than list debts smallest to largest you may prefer to list them from the highest to the lowest interest rate.

This makes better sense from a math perspective.

But, smallest to largest will give most people a bigger emotional boost and subsequent staying power, which is often the most critical and important part.

A Question Arises

Should I be investing or saving new money at the same time I’m working through the list of consumer debts?

The short answer is simple, no.

Once you eliminate your listed consumer debts you should apply every dollar toward saving cash, which we have written more about in this manifesto.

1. After consumer debt is banished build a cash reserve of 3-6 months of your living expenses, which should be saved in something like a high yield savings account.

2. After your 3 to 6-month contingency fund is in place put half of your saved money along with raises, bonuses, inheritances, and congressional “free loot” into paying down the mortgage of your primary residence. The other half goes into investing, which could be both long-term investments or even something like option trading.

3. You are really cruising down the road to financial freedom now.

You are no longer a “consumer.” You are a saver and investor. When real homeownership (no mortgage) converges with a well-grown investment portfolio financial freedom is near.

We’ll speak more of this in later courses in this series and we cover some gems in our series about Building Wealth You Won’t Outlive.

Credit Cards & Debt Summary

Your sensibilities about money have been in development since you were a child. 

Some of them are valid and helpful.

Likely, some are not.

Take the time to evaluate in a dispassionate way how these money scripts are impacting the ways you use or are being used by money.

Nothing will change unless you change.

This is an important process.

So much so that many books, masterclasses, and training courses have been created on such topics.

One of Ryan’s favorites is Secrets of the Millionaire Mind by T Harv Eker, which is available on Amazon here.

Action Items:

1. Look through several credit card statements and see which categories your spending falls in.Are you comfortable and satisfied with the results?

2. Ask yourself, “would I have spent this money if I had to pay cash?”

3. Get started on the 10-step plan above right now. Maybe you are already part or most of the way through.Great.Carry on.

4. Think long and hard about your current money scripts. Also, known as money wounds.

A good question to contemplate is…

Could A Disempowering ‘Money Story’ In Your Head Be Quietly Keeping You Stuck In A Financial Rut?

The short answer for almost everyone that I’ve seen over the years is that chances are likely.

Ken Honda, created a masterclass discussing the Japanese art of healing your money wounds.

In it, you’ll discover how to rise above your negative beliefs, build the wealth you desire and finally make peace with your money.

Ken Honda Japanese Art of Healing Your Money Wounds

What to Expect in Part 2

In part 2 we will be diving into some very key essentials.

This includes; insurance, mortgage, and taxes.

If you haven’t already joined the notification list to get an email update when it goes live you can click here and register now.